Fed optimism drives greenback higher. Commodity currencies hit, with the Aussie hit harder than the Kiwi

Content supplied by BNZ Markets

The USD has shown a broad-based rally post the Fed hike.

The Federal Reserve largely delivered on market expectations, with a 25 bp increase in the target range for the Fed Funds rate to 0.25-0.50bps. 

The policy guidance was for only a gradual increase in the Fed Funds rate, with the path being very much data-dependent.

The dot-plot for 2016 is more concentrated around the median estimate of 1.375%, implying a further 100 bps of hikes next year.  The market reaction on the day was fairly moderate, and Chairwoman Yellen would likely have been pleased with the outcome.

It was a pleasing statement all round, with the message conveying a sense of optimism about the outlook for the US economy and only a gradual approach to monetary policy normalisation.

The USD posted a small gain in the hours after the statement and has extended that rally overnight.  The gain has been broadly based, with the USD rising against all the major currencies.

Commodity-based currencies have been hit the hardest, with the Fed tightening driving commodity prices lower, including gold and copper. Oil prices have fallen yet again and WTI now trades back below $US35 per barrel, helped down by data showing rising inventories.

NZD/USD sits around the 0.67 handle this morning, down about 80 bps since the Fed announcement.  Even a robust NZ Q3 GDP outturn of 0.9% q/q couldn’t stem the depreciation in the kiwi.

The AUD underperformed the NZD, driving NZD/AUD to around 0.9425, with much of the gain happening in the early hours this morning.  The NZD is down on the other major crosses.

UK retail sales were much stronger than market expectations in November, with the ex-fuel and autos measure rising 3.9% yoy compared to the 2.2% expected. This didn’t seem to help GBP though, with analysts pointing to a pay-back from a weak October and strong Black Friday sales. The market seems to be focused on the upcoming referendum on EU membership, with polls providing some doubt on future membership.


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Daily exchange rates

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Kymberly Martin is on the BNZ Research team. All its research is available here.